REITs: property, without the plumbing
A REIT is a leveraged bet on rents and interest rates, wrapped in a share. It is not a substitute for owning a home.
Judge a property company as a business rather than as bricks.
How REITs: property works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
Why a solvent bank can die in 48 hours
The bank lent your deposit out. That is not a scandal, it is what a bank is. It only becomes fatal when everyone asks for their money on the same afternoon.
- 1
The deal: no corporation tax, if it pays out
A REIT escapes tax at the company level on condition that it distributes the large majority of its rental profit to shareholders. That is why the yields are high: it is a legal requirement, not generosity.
- 2
Which means it cannot retain cash to grow
If almost all the profit must be paid out, growth has to be funded by borrowing or by issuing new shares. So a REIT is structurally reliant on capital markets, and when they close, its growth stops.
Watch the share count. A REIT that grows by continuously issuing stock is growing the company, not necessarily your slice of it.
- 3
It is highly sensitive to interest rates, twice over
Rising rates raise its borrowing costs, and they raise the yield that investors demand from it, which pushes the share price down. Property is a long-duration asset, and REITs behave accordingly.
- 4
So read the leases, not the buildings
Length of leases, quality of tenants, vacancy, and when the debt matures. A trophy building let to a failing tenant on a short lease is a worse asset than a dull shed let to a strong one for fifteen years.
You can name the loan-to-value, the average lease length, and when the debt is refinanced.
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A REIT is a leveraged bet on rents and interest rates, wrapped in a share. It is not a substitute for owning a home.
We screen for yield AND the balance sheet behind it, because the biggest yields belong to the companies least able to pay them.